8 Common Tax Credits
With tax season upon us, Americans are looking for ways to reduce their overall tax burden and save as much money as possible. While many people focus on claiming as many deductions as possible, tax credits can also go a long way in reducing your overall tax burden.
8 common tax credits that you may qualify on your federal return for this year include:
- Foreign tax credit
- Recovery rebate credit
- Retirement savings contribution credit
- Premium tax credit
- Earned income tax credit
- American opportunity tax credit
- Lifetime learning credit
- Child tax credit
In this article, we will look at how to know if you qualify for these credits and what to claim the credits if you do qualify.
What is a Tax Credit?
A tax credit is a deduction that allows you to reduce the amount of taxes you owe to the IRS directly. You reduce your credits after your initial tax liability has been assessed.
Tax credits work differently than tax deductions. Your tax bracket does not impact the value of your tax credit, while a tax deduction does. For this reason, tax credits are often considered more valuable than tax deductions.
If you would like to learn more about the differences between tax deductions and tax credits make sure to read our post on the subject.
It’s important to note that there a refundable and non-refundable tax credits. If your refundable tax credits exceed your tax liability, then the IRS will pay you for the difference. However, the IRS will not pay you for non-refundable tax credits that exceed your tax liability.
Foreign Tax Credit
The foreign tax credit is a way for US citizens to receive credit for income that is subject to US taxes that they already paid foreign or U.S. possession taxes on. This is a great way to get a tax break if you worked outside of the country or for a foreign business in any given tax year.
Haven’t left the country or worked for a foreign business? You may still qualify for the tax credit if you invested in foreign mutual funds. If your portfolio included any qualifying investments, it should be noted on the 1099 tax form you receive from your brokerage.
Recovery Rebate
The 2020 and 2021 tax years have been extremely unusual due to the COVID-19 Pandemic. While stimulus checks mostly made it into the pockets of qualified Americans, some never received their money.
If you did not receive your third stimulus payment of $1,400 in 2021, then you may be able to claim this credit. If you didn’t receive the 2020 stimulus payments, then you will need to amend your 2020 returns to claim the credit.
Retirement Contributions Savings Credit
The retirement contributions savings credit is a good way to save on your taxes if you are a low-income family or individual. If you contribute money towards a retirement account and fall under the threshold for your tax status you may qualify.
Those under the following thresholds qualify:
- Married filing jointly – $66,000 in 2021; $68,000 in 2022
- Head of household – $49,500 in 2021; $51,000 in 2022
- Any other status – $33,000 in 2021; $34,000 in 2022
The retirement contributions savings credit allows you to claim up to $1,000 or $2,000 if you are filing jointly.
Premium Tax Credit
If you pay for your healthcare through the Healthcare Marketplace and are a low-income individual or family, you may qualify for the premium tax credit (PTC).
The PTC can be complex. Just know that if you fall within a range of 100% and 400% of the poverty line, you probably qualify. The PTC can be claimed at the beginning of the year or as you file your annual tax return.
If you’d like to learn more about the premium tax credit visit the IRS website.
Earned Income Tax Credit
Another great tool for low-income earners is the earned income credit (EIC). This affords you a tax break if you don’t earn a lot of money and is especially lucrative for those with kids.
To qualify you must meet the following thresholds:
| Number of Children | Max Credit – 2021|2022 | Max AGI (Single) – 2021|2022 | Max AGI (Joint) – 2021|2022 | |||
| 0 | $1,502 | $560 | $21,430 | $16,480 | $27,380 | $22,610 |
| 1 | $3,618 | $3,733 | $42,158 | $43,492 | $48,108 | $49,622 |
| 2 | $5,980 | $6,164 | $47,915 | $49,399 | $53,865 | $55,529 |
| 3+ | $6,728 | $6,935 | $51,464 | $53,057 | $57,414 | $59,187 |
In order to qualify for the EIC, you’ll need to have at least $1 of earned income and under $10,000 of invested income.
American Opportunity Tax Credit
Those parents paying for a child’s undergraduate degree or students supporting themselves can claim the American opportunity tax credit of up to $2,500 per student per the first four years of schooling.
The tax credit can count towards tuition and most expenses associated with attending a class like textbooks.
If you make over $90,000 as a single filer or $180,000 as a joint filer, you are unable to claim this credit.
Lifetime Learning Credit
The lifetime learning credit is a little less restrictive than the American opportunity credit. You can claim 20% of qualified education expenses up to $2,000.
Courses for this credit do not need to be part of a degree program and have no restriction on the number of years that you claim it. However, your AGI does need to be equal to or less than $69,000 as a single filer or $138,000 as a joint filer.
Child Tax Credit
You can claim a huge tax credit if you have children and meet the income requirements. In, 2021, the child tax credit received a massive boost in recognition of the hardships that parents have had to face during the pandemic.
If your AGI was under $75,000 as a single filer or under $150,000 as a joint filer, you could claim $3,600 for each child under the age of 6 and $3,000 for each child 17 or younger. Even if you were above the AGI threshold the credit slowly phased out based on your income.
Additionally, you still received the typical $2,000 child credit as long as joint filers were under $400,000 and single filers were under $200,000.
In 2022, the childcare tax credit has reverted to the standard $2,000 credit per child as long as you meet the income requirements.
How Do I Claim Tax Credits?
The method for claiming a tax credit can vary based on the type of credit. As a general rule, you can claim tax credits when you file your 1040 at the end of each year. However, several credits require additional attachments and forms to be included in order to be properly claimed.
Knowing which forms to complete, or even which credits you actually qualify for can be extremely time-consuming and confusing. At e.file.tax.net we can help you determine which credits you qualify for and even assist you in filing the correct forms. Contact us today to get started with your taxes or file an extension.